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DANDONG, China | The currency changer, brazenly plying his illegal trade in the Bank of China lobby, pulled out a thick

wad of cash from around the world and carefully removed a bill.

The 2003 series U.S. $100 bill was a fake, but not just any fake. It was a “supernote,” a counterfeit so perfect it’s an international whodunit.

It had come from a North Korean businessman, the changer said, getting angry looks from his confederates. He stank of alcohol, but his story was plausible. The impoverished hermit nation sat just across the Yalu River from Dandong.

The Bush administration and members of Congress two years ago loudly accused North Korean leaders of being behind the counterfeiting of U.S. currency, but a 10-month McClatchy Newspapers investigation raises questions about those charges.

As the currency changer told a reporter, “The ones from Europe are much better.”

Whatever the origin of the bills, “it’s by far the most sophisticated counterfeiting operation in the world,” said James Kolbe, a former congressman from Arizona who oversaw funding for the Secret Service. “We are not certain as to how this is being done or how it’s happening.”

•The paper appears to be made from the same cotton and linen mix that distinguishes U.S. currency from others. It includes the watermarks visible from the other side of the bill, colored microfibers woven into the substrate of the banknote and an embedded strip, barely visible, that reads USA 100 and glows red under ultraviolet light.

•The bills include tiny microprint that appears as a line to the naked eye, but under magnification is actually lettering around the coat of Benjamin Franklin or hidden in the number 100 that reads either USA 100 or The United States of America.

•The same optically variable ink, or OVI, is used on the number 100 on the bottom right side of the bill. Exclusively made for, and sold to, the United States, this OVI ink gives the appearance of changing color when a banknote is viewed from different angles.

•At least 19 different versions have been printed, each corresponding to a tiny change in U.S. engraving plates — an odd thing for any counterfeiter to do. Also, they show practically invisible but intriguing additions.

•Stranger yet, the number of supernotes found indicates that whoever is printing them isn’t doing so in large quantities. Only $50 million worth of them have been seized since 1989, an average of $2.8 million per year and not even enough to pay for the sophisticated equipment and supplies needed to make them.

Industry experts such as Thomas Ferguson, former director of the Bureau of Engraving and Printing, said the supernotes are so good that they appear to have been made by someone with access to some government’s printing equipment.

Some experts think North Korea does not have the sophistication to make the bills; others suspect Iran and others speak of criminal gangs in Russia or China.

Klaus Bender, the author of Moneymakers: The Secret World of Banknote Printing, said the phony $100 bill is “not a fake anymore. It’s an illegal parallel print of a genuine note.” He claims that the supernotes are of such high quality and are updated so frequently that they could be produced only by a U.S. government agency such as the CIA.

As unsubstantiated as the allegation is, there is a precedent. An expert on the CIA, journalist Tim Weiner, has written how the agency tried to undermine the Soviet Union’s economy by counterfeiting its currency.

Making limited quantities of sophisticated counterfeit notes also could help intelligence and law enforcement agencies follow payments or illicit activities or track the movement of funds among unsavory regimes, terrorist groups and others.

“As a matter of course, we don’t comment on such claims, regardless of how ridiculous they might be,” said CIA spokesman Mark Mansfield.

The lead U.S. agency in combating counterfeiting, the Secret Service, declined repeated requests for interviews for this story, as did the Federal Reserve Board and the Treasury Department.

The case against Korea

Two years ago, as the administration’s campaign to isolate and financially cripple North Korea’s dictatorship was heating up, President Bush insisted, “We are aggressively saying to the North Koreans … don’t counterfeit our money.”

Asked about his claim last summer, Bush told McClatchy Newspapers, “I’m not at liberty to speak about intelligence matters.”

Many of the administration’s public allegations about North Korean counterfeiting trace to South Korea-based “experts” on North Korea who arranged interviews with North Korean defectors for U.S. and foreign newspapers. The resulting news reports were quoted by members of Congress, researchers and Bush administration officials who were seeking to pressure North Korea.

The McClatchy investigation, which stretched across three continents, found that one source for several stories, a self-described chemist named Kim Dong-shik, has gone into hiding. A former roommate, Moon Kook-han, said Kim is a liar out for cash who knew so little about American currency that he didn’t know whose image is printed on the $100 bill.

The international police agency Interpol issued in March 2005 an orange alert — at America’s request — calling on member nations to prohibit the sale of banknote equipment, paper or ink to North Korea.

A joint Secret Service–Federal Reserve report to Congress in 2006 said the notes were being “produced and distributed with the full consent and control” of the North Korean government.

That July, at the request of the Bush administration, Interpol assembled central bankers, police agencies and banknote industry officials in Lyon, France, to make the U.S. case against North Korea. But the Secret Service never provided any details of the evidence it said it had, instead citing “intelligence” and asking those assembled to accept the administration’s claims on faith.

Interpol’s secretary general is an American, Ronald K. Noble, a veteran of the Secret Service from 1993 to 1996. He declined to discuss the supernotes in detail, but recalled the Secret Service made clear it was “not at liberty to share all of the information” to which it had access.

In the late 1990s, North Korean diplomats were caught passing supernotes in Asian capitals; diplomatic immunity prevents prosecution.

The hardest evidence to surface so far is the 2004 indictment of Sean Garland, a leader of an Irish Republican Army splinter group, who about the same time allegedly ferried more than $1 million in supernotes to Europe, mostly from the North Korean Embassy in Moscow. Garland is now in the Republic of Ireland, but the Irish Embassy said the U.S. hasn’t sought his extradition.

More recently, in August 2005, the Secret Service announced two separate sting operations — Royal Charm and Smoking Dragon, in which Chinese crime gangs were accused of smuggling supernotes into New Jersey and Los Angeles.

David Asher, who was coordinator of a working group at the State Department that collected details on North Korean criminal activities, said his group turned up evidence of the counterfeiting and didn’t rely on “intelligence” to make its case. Asher, now a researcher at the Heritage Foundation, a conservative Washington policy organization, declined to provide any details.

John Bolton, former U.S. ambassador to the United Nations and a hardliner on North Korea, told McClatchy that he never saw hard evidence that Pyongyang was making the supernotes. But he said the evidence that the North Koreans distributed them is sufficient proof of bad behavior.

The questions

“I never really saw the intelligence myself to make an independent judgment,” said Carl Ford, who quit as head of the State Department’s intelligence bureau in 2003 because he challenged the administration’s phony claim, based largely on defectors, that Iraq had weapons of mass destruction. The administration’s reluctance to disclose details on North Korea “doesn’t pass the smell test,” he said.

In May 2007, the Swiss federal criminal police, which is on the lookout for counterfeit currency and has worked closely with U.S. financial authorities, called on Washington to present more evidence. The Bundeskriminalpolizei said it doubted that North Korea was behind the supernotes.

“Using its printing presses dating back to the 1970s, North Korea is today printing its own currency in such poor quality that one automatically wonders whether this country would even be in a position to manufacture the high-quality supernotes,’” the Swiss agency reported.

The setting for the counterfeiting charges was the effort to pressure the regime of Kim Jong-il to abandon its nuclear weapons programs.

Washington accused a tiny bank in the Chinese enclave of Macau of helping North Korea launder counterfeit notes. The U.S. Treasury blacklisted the Banco Delta Asia and issued a ruling in March 2007 that effectively shut the bank down and froze $25 million in North Korean funds.

When the U.S. relented, Macau lifted its sanctions against the bank and allowed the bank to transfer $25 million back to North Korea, although the Treasury Department, citing “intelligence,” maintains the bank’s blacklisting.

Meanwhile, the Bush administration is no longer publicly accusing North Korea of producing the supernotes and has dropped the subject from talks on halting North Korea’s nuclear weapons program, according to State Department officials.

McClatchy obtained an audit by the international accounting firm Ernst & Young on behalf of the Macau government that indicated only a single case of counterfeit notes was found at Banco Delta Asia. This was in 1994, when the bank found the notes and alerted authorities.

And those fakes did not originate in North Korea.

The details

Banks around the world are still seizing supernotes. The first one was spotted by a sharp-eyed banker in the Philippines in 1989.

Since then, about $50 million worth have been found. “The seizures are not necessarily indicative of the amount in circulation,” noted Bolton, who accuses the Bush administration of going soft on North Korea.

The oddities do not stop there. Whoever is making them seemed to deliberately add minuscule extra strokes, as if trying to flag the phony bills, the Swiss noted. For example, at the very tip of the steeple of Philadelphia’s Independence Hall, the counterfeit bills have a line along the left vertical edge that is not on the real bills.

One other interesting difference: The fakes lack microscopic ink splotches that appear on real U.S. currency, which is made in large press runs and stacked one sheet on another.

The ink’s maker, a Swiss firm named Sicpa, mixes the ink at a secure U.S. government facility. The highly specialized and regulated tint also is used on the space shuttle’s windows. A Sicpa spokeswoman declined to discuss the supernotes, but offered an important fact: “We ceased all OVI deliveries (to North Korea) in early 2001, and later in the year all security ink supplies.”

Ferguson, who ran the Bureau of Engraving and Printing from 1998 to 2005, said: “They are not using somebody else’s paper or bleaching the ink off of genuine notes. Someone specifically made paper, which is a pretty big commitment.”

The supernotes incorporate at least 19 running changes that the United States has made to its engraving plates since 1989, from the names of Treasury secretaries and treasurers to blowing up the image of Ben Franklin on the $100 — something that most counterfeiters can’t or don’t bother to do.

In 1996, the Bureau of Engraving and Printing redesigned the $100 bill, adding security features and an off-center, larger Franklin portrait. In less than a year, new supernotes appeared.

“It goes way beyond what normal counterfeiters are able to do,” said Bender, whose book first spotlighted the improbability of North Korean supernotes. “And it is so elaborate it doesn’t pay for the counterfeiting anymore.”